An Overview of the Impact of the Commodity Price Boom on the South African Economy

Between January 2002 and July 2005, the South African exchange rate has appreciated by more than 30 per cent. At the same time, there has been widespread news coverage of the decline in several manufacturing sectors, notably clothing and textiles. Over the same period, commodity prices have risen substantially. The gold price rose from an average of $310 per ounce in 2002 to an average of $436 in 2005. The platinum price rose from an average of $541 per ounce to $887 over the same period.

This has led some commentators to speculate that high commodity prices have led to the appreciation of the rand, and the subsequent lacklustre growth in output and decline in employment in the manufacturing sector, along the lines of a classic case of the 'Dutch disease', where an economy is harmed by commodity abundance. These commentators are concerned that once our manufacturing sectors are lost, we may not be able to rebuild them, and we will lose the dynamic benefits of having a manufacturing sector, which include skills accumulation and economies of agglomeration.

In this paper, we begin with a definition of what is meant by a commodity and what is meant by a manufactured good, and we describe the commodity price time series we use. We then provide an overview of the literature on the 'Dutch disease' effect, followed by an analysis of the impact of the commodity price boom on South Africa. Finally we present our conclusions, and some potential policy interventions emanating from the literature on Dutch Disease.